This blog is about macro-economics, financial markets and the world that has been pulled over your eyes to blind you from the truth.

— Neo: What truth?
— Morpheus: That you are a slave, Neo.

2011-05-17

Precious Metals Continue Their Decline While Seems Still Not Being Impacted

After a big 7-8% rally that was clearly expected and forecast here — exactly what was needed to suck in the bulls — the decline has started again and silver and gold are now very close to the lows experienced last week.

Several metrics show that bullishness is still extreme and that silver and gold bugs are still buying the decline, which means we are still in the denial phase. Checking the few comments they leave on various blogs — including this one — is providing some helpful guidance.

Coins and bullion sales shows sentiment still not impacted. Same for the market commentators:

May 16 (Bloomberg) -- Sales of gold coins are on track for the best month in a year amid the worst commodities rout since 2008, a sign that bullion’s longest bull market in nine decades has further to run, if history is a guide.

The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1 as the Standard & Poor’s GSCI Index of 24 raw materials fell 9.9 percent. The last time sales reached that level, bullion rose 21 percent in the next year. Gold will advance 17 percent to a record $1,750 an ounce by Dec. 31 and keep gaining in 2012, the median estimate in a Bloomberg survey of 31 analysts, traders and investors shows.

Investors in exchange-traded products backed by the metal accumulated $98 billion of gold as prices rose 74 percent since U.S. borrowing costs fell to near zero in December 2008 and the Dollar Index dropped 6.2 percent. With the gauge, a measure against six currencies, forecast to weaken through 2012 and the Federal Reserve expected to keep rates on hold through the fourth quarter, the rally may not reverse any time soon.

“There is no sign that gold has peaked,” said Martin Murenbeeld, the chief economist at Toronto-based DundeeWealth Inc., which manages about $85 billion in mutual funds and brokerage accounts. “We’re going to find that the U.S. economy is not very strong,” he said. “A low interest-rate environment will remain for possibly all of 2012. The dollar goes down.”
[...]
While the 2,041 metric tons accumulated through metal- backed ETPs helped drive prices higher, it also represents a threat. Holdings dropped 3.3 percent in the first quarter, according to data released by the ETP providers. The details of which investors changed their holdings in that period are being revealed in Securities and Exchange Commission filings.

Touradji Capital Management LP, founded by Paul Touradji, sold 173,000 shares in the SPDR Gold Trust during the quarter, valued at about $24 million as of March 31, an SEC filing May 13 showed. Astenbeck Capital Management LLC, run by Andrew Hall, bought a stake in the Market Vectors Gold Miners ETF valued at $32.5 million on March 31, a separate filing shows.

Soros Fund Management LLC held 4.72 million SPDR Gold Trust shares as of Dec. 31, equal to about 14 tons, an SEC filing Feb. 14 showed. Soros described gold in January last year as “the ultimate asset bubble.” The fund sold some holdings because it no longer expects deflation, the Wall Street Journal said May 4. Michael Vachon, a spokesman for Soros, declined to comment.

John Paulson’s Paulson & Co., based in New York, held 31.5 million shares in the SPDR Gold Trust on Dec. 31, making it the single biggest investor, an SEC filing in February showed.
[...]It’s not just the U.S. Mint that saw accelerating sales. Rand Refinery Ltd., which makes the Krugerrand, said May 13 that sales are heading for their best month since August. Demand for physical gold on May 6 was the strongest since early February, Standard Bank said in a report May 11. The U.S. Mint sold 62,000 ounces of American Eagles in the first week of May, as the S&P GSCI slumped 11 percent, the most since December 2008.

Those sales are “certainly reflective of a strong wave of demand for physical metal,” said Ross Norman, chief executive officer of Sharps Pixley Ltd., a London-based bullion brokerage. “What drives people towards physical metal, as opposed to ETF or futures, is fundamental insecurity. It’s like safe haven in extremis.”

UBS AG, Switzerland’s biggest bank, had its second-best day this year for physical sales on May 9, according to a report the following day. The bank’s sales to India, the world’s top bullion consumer, are more than 10 percent higher than in 2010.

“There are more factors than at perhaps any other time in history that would suggest to investors they should own gold,” said Michael Haynes, chief executive officer of American Precious Metals Exchange, an online bullion dealer that had its three best sales weeks ever in April and May. “We don’t know if the euro is going to crack or stay and the dollar is facing challenges as the world’s reserve currency.”

Haynes, based in Oklahoma City, expects to ship as many as 15 million precious metals coins or bars this year, double last year’s figure. The University of Texas Investment Management Co., the second-largest U.S. academic endowment, said April 14 it took delivery of about $1 billion of gold bars.

Another warning sign for the rally may be central banks adding to their reserves for the first time in a generation. Mexico, Russia and Thailand bought about a combined $6 billion in February and March, International Monetary Fund data show. Central banks hold 30,575 tons, equal to about 18 percent of all the metal ever mined, the data show.

The banks were also boosting holdings in 1980 when gold rose to a then-record $850, only to fall for most of the next 20 years. That high is equal to $2,299 in inflation-adjusted terms, according to a calculator on the website of the Federal Reserve Bank of Minneapolis. Prices tripled from 1999 through the beginning of 2008 as the banks sold more than 4,000 tons.

“Central banks don’t have the best track record trading gold,” said Malcolm Freeman, managing director of Ambrian Commodities Ltd. in London. He pointed to the U.K., which sold about 400 tons over about a two-year period ending in 2002, getting no more than $296.50 an ounce.
[...]“Near term, we like gold and we like agriculture,” Jeffrey Currie, the London-based head of commodity research at Goldman Sachs Group Inc., told Maryam Nemazee on Bloomberg Television’s “Last Word” May 13. The team correctly predicted this month’s slump in commodities, telling investors April 11 to end a recommended trade in oil, copper, cotton, platinum and soybeans that returned 25 percent in about four months.

“Gold is simply pricing sovereign default risk, it still remains a big issue,” Currie said. “There’s a lot of concern over the end of QE and noise of QE3, so that kind of risk will continue to support gold prices. We see them trading up to the high $1,600s at the end of this year and going into the mid-$1,700s next year.”

In the meantime, Soros — whose Keynesian and pro-government political views I despise — has not failed his reputation and sold all his gold holdings at the very peak. Yet interestingly, every commentator will say that Soros should have hold onto his gold and that it will keep on rising.

(Bloomberg) — [...] Soros Fund Management LLC held 49,400 shares of SPDR Gold Trust as of March 31, compared with 4.721 million at end-December, according to the U.S. Securities and Exchange Commission. It also sold all 5 million shares in iShares Gold Trust.

“Soros was sitting on a huge profit and like a lot of investors of late, he was happy to take those profits off the table,” said Gavin Wendt, founding director at MineLife Pty in Sydney. “That shouldn’t surprise people. Gold has been rising for a decade for fundamental reasons, which haven’t gone away.” [...]

Soros had bought gold to protect against possible deflation, though his fund now believes there is a reduced chance of such a condition, the Wall Street Journal recently said, “citing people close to the matter”.

Should Soros and his fund think that inflation is now a greater risk than deflation then it is curious that they would sell all their ETF holdings. It is also curious as Soros is on record regarding having serious concerns regarding the outlook for the euro and the dollar and the dollar as reserve currency of the world.

There is of course the precedent of other hedge fund managers , such as David Einhorn, who have also sold their gold ETF holdings but bought physical bullion in allocated accounts due to a concern about counter party and systemic risk.

It is quite possible that Soros’ fund has adopted a similar strategy.

This would allow Soros to discreetly accumulate bullion away from the public and media spotlight that result from SEC filings.

Paulson & Co., the $36 billion hedge fund founded by John Paulson kept its largest holding - $4.41 billion in the SPDR Gold Trust. Paulson’s belief in gold is seen in the fact that those who buy his fund can have their stakes denominated in gold rather than in dollars, meaning the value of their investment rises and falls with the price of bullion – lessening exposure to the dollar.

Paulson, unlike Soros, is on record as having purchased gold to protect against inflation.

Of course, no one knows where gold and silver are headed nor what Paulson or Einhorn are planning to do, so I'll give them the benefits of the doubt.

Sprott is very much becoming pathetic. I used to respect him, but like many other market commentators, when they are losing money and their bets sour, they also lose their mind and reveal their true self.